How much money do I need at retirement so that I can comfortably meet all my expenditures till death, live in peace and don’t have to depend on anybody else?
This is one question which plagues everyone’s minds, especially if you are in your late 30s or mid-40s.
Retirement planning is one of the basic tenets of any financial planning plan.
Retirement is characterised by the following peculiar features:
During retirement you don’t earn any regular income (salary/fees/business/profession),
Interest income on fixed deposits generally is your biggest source of income; in some cases pension/rent/dividend on shares as well,
Your expenses are lower as most of the milestone expenditure like children’s education, marriage, et cetera have been covered,
Medical expenses are high due to old age issues, Travel expenses are also high in some cases.
So you need to save regularly during your earning years, also called accumulation stage, to build a fund or corpus which would fetch you enough returns to meet your expenditure during your lifetime after retirement.
Normally, 60 is considered the retirement age in India. Retirement phase is also called the distribution stage.
India’s average life expectancy is currently 69.33 years. This has been steadily increasing over the years due to a decline in infectious diseases, improvement in medical facilities, etc. Indians have gained a decade of life expectancy since 1990. So you need to consider this as well.
The earlier you start saving for retirement the better it is as the monthly load would be less and you will also get the benefit of compounding.
At retirement, you invest your corpus in instruments like fixed deposits, monthly income plans of mutual funds and meet your expenses through interest earned on these investments.
Factors to be considered while calculating retirement corpus:
Monthly/Yearly lifestyle expenses on retirement
Retirement benefits available, like pension, if any
Rate of inflation
Number of years to retirement
Likely return on investment till retirement
Number of years to provide for (Life expectancy minus 60 years)
Likely return on investment post retirement
Let’s assume A is 32 years of age. His retirement is at 60. So he has 28 years until retirement. His monthly expenses is Rs 60,000. One-third of this is on his two children. So, monthly expenses on retirement will be Rs 40,000 (at current rates) as by the time he retires, his children would have settled.
Current life expectancy is 70 years. However, we have seen in 3 decades, Indians have added 10 years to their lives. Thus, by the time he turns 60, life expectancy could be 80 years. By the time he turns 80, another 5-6 years would have been added. Let’s assume it at 85. So he has to provide for expenses for 25 years after retirement.
The inflation rate is let’s say 7%. Till retirement he expects to earn 10% per annum on his savings. Post retirement he expects to earn 8% on corpus, 1% more than inflation on a conservative basis. His net return is around 1%. Let’s assume no retirement benefits are available to him.
The current yearly expenses of Rs 4.8 lakh will increase by 7% per annum till retirement due to inflation. This is likely to become Rs 31.91 lakh per annum at age 60, more than 6 times the current expenditure. So, the corpus should be such that when invested it should earn this much money as interest per year and also take care of post retirement increase in living expenses.
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The retirement corpus is the present value (PV) of the discount rate, number of years to provide for, and annual expenditure at age 60. In excel the formula is PV(Rate, Nper, Pmt).
The discount rate is 0.93%, (1+post retirement return divided by 1+inflation minus 1), that is (1.08/1.07-1).
The retirement corpus required is Rs 7.08 crore, PV (0.93%, 25, 31.91 lakh) as shown below.
So A needs Rs 7.08 crore worth of funds to meet his current yearly expenses adjusted for inflation during retirement till age 85.
How much does A need to start investing from today yearly to accumulate a retirement corpus of Rs 7.08 crores? A’s age is 32 and he has 28 years of accumulation. The investments he makes are expected to generate 10% return per annum.
Essentially, how much money he needs to save yearly in 10% return instruments which would turn out a future value of Rs 7.08 crores at age 60.
For this we use the PMT function in excel which is used to find out periodic payments. The amount of yearly savings required is PMT (10%, 28,0,7.08 crore) which turns out to Rs 5.28 lakh.
So, A needs to save Rs 44,000 per month to create a corpus of Rs 7.08 crore by age 60 which would be sufficient to meet his and spouse expenses during retirement till age 85.
A’s monthly expense was Rs 60,000 in the example above. He needs to save Rs 44,000. So his income should be Rs 1.04 lakh net of taxes.
If his income is lesser, he should save whatever he can and then increase it once his children get settled or use bonus / one time earnings to boost his corpus.